Focus on FOMC meeting

KBC Market Research Desk KBC Bank

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Global core bonds ended mixed on Friday with US Treasuries significantly outperforming German Bunds. The latter ended flat on the day. Disappointing US eco data (empire manufacturing business survey and industrial production) lifted US Treasuries. The US 10-yr yield lost 2.61% intermediate support, accelerating the move. Some final positioning into this week's dovish anticipated FOMC meeting and the end to the US Treasury's mid-month refinancing operation fuelled the upleg further. US yields lost 2.5 bps (2-yr) to 4.2 bps (10-yr) in a daily perspective. Changes on the German yield curve varied between -0.2 bps (10-yr) and +0.4 bps (2-yr). 10-yr yield spread changes vs Germany narrowed up to 2 bps. S&P raised the Portuguese rating from BBB- to BBB (stable outlook) after trading hours.

Most Asian stock market copy Friday's WS gains with China (+2%) outperforming. Saudi Arabia said that the job of balancing the oil market (via production cuts) was nowhere near complete. Brent crude remains just below $68/barrel resistance with many anticipating an official accord at the April or June OPEC+ meeting. Core bonds edge marginally lower this morning.

Today's US eco calendar contains the US NAHB housing market index. Consensus expects a stabilization in March which should help stem fears about an overvalued market. Investors might especially be sensitive to disappointing eco data in the current environment. Any market action could be limited though ahead of Wednesday's FOMC meeting. Fed chair Powell already suggested in front of US Congress to halt the balance sheet run-off by the end of the year. That's much sooner than the Fed originally had in mind and market participants had expected until the turn of last year. Apart from this, we only expect the Fed's plotted rate hikes to drop from 3 currently (2 in 2019 and 1 in 2020) to 1 (in 2019). Long term bond yields will probably remain under some downward pressure in anticipation of a dovish Fed remaining sidelined for longer. Patience will again be the buzz word in the Fed statement. The US 10-yr yield lost intermediate support (2.61%), suggesting a return to the 2.49% bottom channel. The March ECB decision to delay the earliest timing for an interest rate hike into 2020 pulled German yields to their lowest levels since the end of 2016. In combination with the grim outlook, it might mean no ECB rate hikes at all this cycle. The technical picture suggests a return to negative levels for the German 10-yr yield unless we see a pick-up soon in growth/activity data.

The Belgian debt agency holds its first regular tap auction of the year following two successful syndication at which they raised a combined €11bn of this year's €28bn OLO funding need. Bonds on offer are OLO 82 (0.5% Oct2024), OLO 87 (0.9% Jun2029) and OLO 86 (1.25% Apr2033) for a combined €2.5-3bn.

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KBC Market Research Desk

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